NEW YORK (Dow Jones)--A class-action lawsuit filed Wednesday claims that ProShare Advisors LLC and others violated a securities act by failing to disclose risks inherent in its ProShares UltraShort Real Estate fund (SRS), an inverse leveraged exchange-traded fund, including the risk of a "spectacular tracking error."

The complaint, filed by New York-based law firm Labaton Sucharow LLP in the U.S. District Court for the Southern District of New York, alleges that the fund's registration statements, prospectus and statements of additional information were "false and misleading." It alleges that Proshares Trust; ProShare Advisors; ProFunds Group Chairman and Chief Executive Michael Sapir and its president, Louis Mayberg; and other defendants sell Ultra and UltraShort ETFs as "simple" directional plays.

"As marketed by ProShares, Ultra ETFs are designed to go up when markets go up; UltraShort ETFs are designed to go up when markets go down," the complaint says. SEI Investment Distribution Co., the fund's distributor, is also named in the suit.

ProShares UltraShort Real Estate fund seeks daily results, before fees and expenses, that correspond to twice the opposite of the daily performance of the Dow Jones U.S. Real Estate Index, the company says on its web site.

Yet, according to the lawsuit, when the index fell about 39.2% from Jan. 2, 2008 to Dec. 17, 2008, the SRS fund fell about 48.2% - "the antithesis of a directional play."

ProShare Advisors said in a statement: "The allegations reported in the complaint are wholly without merit. ProShares' registration statements have always been accurate and complete, contained all material information, and complied with all legal requirements. We plan to defend against this suit vigorously."

The lawsuit comes as some brokers place constraints on sales of leveraged or inverse ETFs, or stop them outright. Questions about the products' suitability as long-term investments have also raised regulators' concerns.

According to the lawsuit, the defendants failed to disclose in the fund's registration statement that inverse correlation between the fund and the index "over time would only happen in the rarest of circumstances, and inadvertently, if at all," the extent to which the fund's performance would diverge from the index - "the probability, if not certainty, of spectacular tracking error," the "severe consequences" of high market volatility on the fund's objective and performance and that the fund causes dislocations in the stock market, among other risks.

Christopher Keller, a partner with Labaton Sucharow LLP, said an investor reading the UltraShort Real Estate fund's disclosures in a holistic way may understand that the fund may not perfectly replicate the index over a period of time, but is never left with the strong belief that even if they bet in the right direction, they may lose a significant portion of their investment.

"Even if they innnocently failed to disclose how this product would work, they're still liable," Keller said.

The complaint was filed on behalf of Steven Novick, a Connecticut resident who invested in the fund, but another lead plaintiff will likely be named.

Keller said the firm has received at least 50 calls from investors who claim to have been harmed by the fund, including professional investors and individuals.

ProShares states on its web site that, "Due to the compounding of daily returns, ProShares' returns over periods other than one day will likely differ in amount and possibly direction from the target return for the same period. Investors should monitor their ProShares holdings consistent with their strategies, as frequently as daily." It's unclear how long that warning has been on the site.

Morgan Stanley Smith Barney, a joint venture of Morgan Stanley and Citigroup, said recently that it was reviewing its sales practices regarding leveraged ETFs.

Earlier, UBS's UBS Wealth Management Americas suspended purchases of leveraged ETFs. LPL Investment Holdings of Boston prohibited sales of the leveraged ETFs that seek more than two times the long or short performance of their target index, and Ameriprise Financial of Minneapolis told its advisers to stop soliciting the purchase of the products.

The moves by brokers came after the Financial Industry Regulatory Authority in June issued a reminder to brokers and advisers, urging them to use care in selling inverse and leveraged ETFs.

The greedy lawyers are at it again. The lawyers are the only ones that make out in these lawsuits, can't Fu$king believe investors actually go through the process to recover 4 or maybe 11 cents on every share owned. Fu$king pathetic.